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Meanwhile, back at the ranch...

One number, sometimes that's all an investment revolves around, just one single number. Sure other things need to be considered and weighted, but everything hangs in the balance on that one solitary number. Get the number wrong and the investment fails, get the number right and even with other errors things will still work in your favor. Not many investments can be condensed down to a specific number, Aztec Land and Cattle company can.

Aztec Land and Cattle is a simple company, they own land, lots of ranch land in Arizona, 228,040 acres to be exact. The company started back around the time of the civil war acquiring a million acres of land in for the price of 50¢ an acre. Through the years the land was ranched and parcels sold off until Aztec was left with its current 228,040 acres around the area of Snowflake AZ.

The land is currently used for cattle grazing generating a modest income for the company. The company has financial statements which they make available to shareholders, but those don't matter all that much to this investment, what really matters, the one number that matters is what is that land worth?

Most people have a quick negative reaction when hearing Arizona, land and value in the same sentence. But the question should be framed differently, "Is ranch land in Arizona really only worth $49 an acre?" I'm no expert, but $49/acre seems awfully cheap, unreasonably cheap. And when I see something unreasonably cheap my ears perk up..

If Aztec was content leasing out their land for grazing and never intended to do anything with the land this investment wouldn't really be that interesting. What makes it interesting is that the company has put together a plan to actually monetize the asset. The plan is hosted on their website, but not wanting to crush their server I also uploaded the PDF to Google (it's 158megs!). Aztec built out a comprehensive development plan for both residential and commercial usage. What makes this even more interesting is that due to the size of the land holding they were able to get their plan approved as the official county development plan. What this means is that over the next 30 years as development takes place in Navajo County AZ the development will take place as Aztec has planned it. This has already begun when the state referenced the plan to determine the placement of new roads in the county.

Another aspect that makes Aztec interesting, besides the gross acreage the company also owns water rights under their land. The water on Aztec's land includes a few high quality groundwater reserves without detectable drawdown. This in addition to the numerous streams that also run through the property.

A second aspect that could make Aztec some money is that a portion of their land is being considered for a wind farm. If the wind farm is approved and built Aztec will receive lease revenue from the windmills. There's a section in the comprehensive plan that discusses this for the curious.

The water and wind are both potential catalysts, but the reality is this whole investment rests on the value of the land.

So what is that land worth?

Aztec's land could be the highest quality land in the world but if they don't have a way to monetize it there isn't much value for shareholders. I did some Googling of local real estate firms near Snowflake AZ looking for raw land zoned for residential and got a range of current values for residentially zoned raw land. I found acreage prices ranging from just over $1000 an acre up to $2700 an acre. I'm sure someone will stop reading here and calculate $2700 * 228,040 = $615m against a $11.1m market cap, think this is a slam dunk and put in a market order, don't do it, keep reading.

Another way to look at Aztec's value is how do they value it themselves? In their thin annual report they mention they sold 7,102 acres to their subsidiary for $461,677 which works out to $65 an acre a full 30% higher than the current market price.

What we need to think about is that while Aztec's land could eventually have a significantly higher value per acre it's at some point during the next 30 years. The value of the company ultimately rests on how much of their plan is executed and when it's executed.

I put together a small spreadsheet outlining some scenarios to show what a potential value for Aztec could be depending on when development begins, and how much of the plan is ultimately executed over the next 30 years. Think of this spreadsheet as educated wild guessing.

I used $1000 an acre as my base value and adjusted it up for inflation. I didn't adjust the price up each year, my BAII plus can't quite handle that and I'm not looking for precision, just ranges. The time to develop is the length of time between now and whenever development begins. I think the most reasonable is that development won't start for another 10 years or so and maybe 50% of Aztec's plan is executed. If that happens this company is worth at least double, my suspicion is that the land will eventually sell for more than $1000 an acre, and even if it takes 10 years for the plots to begin the asset conversion process.

So is this a buy?

I really don't know to be honest. It seems unreasonably cheap at $49/acre, but based on my spreadsheet a lot depends on how long, how much, and for how much. This company intrigues me to no end, it's a chance to own a bit of the wild west stapled to a lottery ticket based on Arizona's eventual growth. If nothing else Aztec Land and Cattle is for patient investors, if you have the ability to hold this for 5, 10 or 15 years I have almost no doubt you'll do well. This is the sort of investment that rewards those with a long time horizon, and the ability to see out past the present negative Arizona sentiment.

More Information
Ticker: AZLCZ
Website: http://www.azteclandco.com/ (there is nothing there except for a picture and a link to the PDF)

4 comments:

Most of the land is not anywhere near Snowflake: your $1,000/acre land value estimate is much too high, at least in regards to the current value of the land.

Here's a point to consider: a couple of months ago PICO sold a big block of remote land in Nevada, I think they got $75/acre or so.

Of course, Aztec does own *some* acerage near Snowflake, but it's only maybe 1% of the total acerage. Check out the detailed maps on the PDF you link to. They also own a modest amount of acerage near Holbrook, but, again, the vast majority (95%+) of their land is very very rural right now. The picture on the Aztec website is entirely accurate and quite typical of the area.

Also, I would expect it will take 30-50 years to monatize the assets. 10 years is wildly optimistic. Look at other land development companies -- there are quite a few out there at various stages of development -- and observe *how long* these kinds of things take (decades!).

I think you might have misread my post. I agree with you that it will take a long time to monetize the land, my assumption was that nothing would happen in the next ten years, then over the twenty following different percentages of the land would be developed. In the most optimistic scenario I say that 50% of the land is developed over 30 years. Do you think that developing 50% of the plan over 30 years is too optimistic?

With regards to the 1000/acre you're right. Like I said in the post it's not worth that today at all, but if the plots are sold as residential according to the plan they could fetch in the $1000 range. So the theory is they develop the cities outward and current ranch land in 25 years might be semi-rural thus fetching $1000 acre when someone wants to build a house out on it. This is why I created that spreadsheet discounting the future value back to the present with the NPV calculation.

For the current value of the land I think the company's own value is probably accurate at $65 an acre.

Hopefully this clarifies things a bit, I thought I was clear in the post, but maybe not clear enough, sorry.

I think it is worth pointing out, that by buying AZLCZ, you MAY be getting a very cheap option on the water rights. The below article from 2006 shows that AZLCZ is actively asserting its water rights. However, I have not clue how to value them. I am sure there is much variance on the value "experts" would assign to these rights.

Of interest, is that APS was getting about 70% of its water supply from AZTEC (or 3.5 Billion gallons per year). AZTEC wanted to charge them $150 per acre foot (an acre foot being 326,000 gallons). This would have been about 10,000 acre foots...multiply by 150$ gets you to 1,500,000 million per year. This alone would have supported a 10,000,000 market cap.

Note that AZTEC got none of this in the settlement. But it is revealing in that it points how the potential high stakes (and rewards) involved in water rights.

If you can assert the land covers the current market cap, then you are getting this for free.

Nate- take a look at this report on Aztec. I believe you will find this worthwhile in your analysis of Aztec Land and Cattle Company and the value proposition. Thank you for your continued efforts in this space.